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Auditor General: Navy budget for new ships ‘insufficient’

The Versatile Pacific Shipyards in North Vancouver have been busy with ship assembly since the foundation of North Vancouver's first shipyard in 1906. During the heyday of ship building, the yards produced everything from commercial steamships to military craft during the war. COLLEEN KIDD/sterling news service.

OTTAWA — The dancing shoes were out in force Tuesday as federal ministers, departmental officials and industry skirted questions over whether billions more dollars will be needed to make sure the government’s national shipbuilding plan doesn’t sink.

The issue emerged after Auditor General Michael Ferguson released a report earlier in the day that said the $26 billion the government has set aside to replace the navy’s aging destroyers and frigates is “insufficient.”

The report also notes trade-offs have already been made to keep the Navy’s new resupply ships and Arctic patrol vessels within their own respective $2.3-billion and $3.1-billion budgets, and that future trade-offs are likely unless the feds are prepared to ante up.

As first reported by Postmedia News last week, the auditor general found the problem is that the budget for each shipbuilding project was based on “rough estimates,” most of them arrived at years ago and never revised to reflect current circumstances.

That includes accounting for rising costs for raw materials, labour and military components for ships, as well as the government’s decision to roll the projects together into one major shipbuilding strategy.

“The initial budget for each class of military ship was set years before construction will begin,” the auditor general’s report reads. “As such, the estimates were very imprecise and should be regarded as, at most, placeholders.”

Public Works Minister Diane Finley, who is charged with overseeing the shipbuilding plan, refused to be pinned down on whether the government has set a hard cap on how much it is willing to pay for the new ships, or if there is flexibility.

The government has committed that it will provide the navy the equipment it requires, she said, “so we’re working with the Department of National Defence in identifying what those needs are, what equipment is appropriate, and doing that in a way that respects taxpayer dollars.”

In their own response to the auditor general’s report, National Defence and Public Works said “high-fidelity cost estimates” will be available as design work continues, and that additional money “will be requested, as appropriate.”

Officials confirmed they are prepared to go back to government for more money if the Navy faces a situation where it won’t be able to do its job.

But they maintained there remained plenty of wiggle room as planners juggle numbers.

“Every shipbuilding project involves hundreds if not thousands of compromises,” one official said, on condition of anonymity per government rules.

Even then, the auditor general report raised concerns about the government’s defence strategy, notably what it saw as a lack of clarity on what the government expects the Navy to be able to do.

“While the (defence strategy) did outline the expected number of Navy ships and the core missions for the Canadian Forces,” the report reads, “it did not define the specific naval capabilities required to fulfil the government’s level of ambition.”

This appears to confirm critics’ suggestions that the defence strategy, which promised $490 billion of investments in the military over 20 years, is little more than a shopping list.

The auditor general praised the way the government went about selecting Halifax and Vancouver as the main shipyards for the national shipbuilding strategy, describing the process as “efficient” and “independent from political influence.”

But while the auditor general’s report said the plan “shows promise,” it added that “as with anything new, there are risks involved, and these will need to be closely monitored on an ongoing basis.”

The report notes there is a keen interest in all players — industry, the navy and government — in seeing the shipbuilding plan succeed.

The two companies responsible for the majority of the shipbuilding work, Irving Shipbuilding in Halifax and Seaspan Marine in Vancouver, praised the national shipbuilding plan but did not address the issue of budgets.

“We’ve established a strong working relationship with the federal government that we are confident will be maintained throughout the program,” Irving president Kevin McCoy said in a press release. “We will continue to work closely with Canada to design and build the most cost-effective, capable ships for the Royal Canadian Navy.”

“We have a long and established track record of working with the Royal Canadian Navy and Canadian Coast Guard in building ships on-time and on-budget,” Seaspan president Brian Carter said in his own press release. “Seaspan is committed to returning B.C.’s shipbuilding industry to its once-thriving roots. We will deliver world-class ships to Canada.”

But retired vice-admiral Ron Buck, president of the Navy League of Canada, said the auditor general’s report confirms what his own organization has been warning about.

“In the absence of increased funding, there is risk that the number and capability of ships promised to be delivered will have to be decreased to remain within approved budgets,” Buck said in a statement.

“The impact of such an outcome will be that that the promised delivery of 15,000 well-paying, skilled jobs over 30 years for Canadians, as promised in the recent speech from the throne, will likely be left unfulfilled.”

In addition to budgetary concerns, the auditor general’s report also takes issue with some ways the broader shipbuilding plan has been managed.

For example, it says that while transforming the shipyards in Halifax and Vancouver into strong, competitive manufacturing centres is a key objective of the shipbuilding plan, the government hasn’t established a way to measure success.

It also says that while the two shipyards are expected to upgrade their infrastructure on a specific timeline, there is no penalty if this happens behind schedule even though “this could result in delayed construction and increased costs” to the Navy’s ships.

This would add further pressure to project budgets.

It also notes that taxpayers could be on the hook for as much as $500 million if the shipbuilding plan goes off the rails thanks to an agreement with the two shipyards.

The shipbuilding strategy was launched in June 2010 and its success or failure has wide implications.

It is vital for the Navy and the coast guard, both of which operate fleets of destroyers, icebreakers, frigates and other vessels that are nearing the end of their lifespans and must be replaced.

It is huge for Halifax and Vancouver, which were selected in October 2011 as the main production centres and are expecting to see hundreds of jobs created.

And it is important to the Conservative government following problems with the F-35 stealth fighter, search-and-rescue aircraft and other military procurement projects.

The Projects

Joint Support Ships

Intended Purpose: Main resupply vessels for the Canadian Forces. They will carry fuel, food, ammunition and spare parts to support missions at sea and on land. They will also hold helicopters and have advanced medical and dental facilities.

Budget: $2.6 billion

Number: Two, with an option for a third

Construction Yard: Vancouver

Background: First announced in 2007, with intention to buy three for $2.1 billion and delivery to happen in 2012. Plan scrapped in 2008 after industry said budget was too small. Re-launched in 2010 with revised budget. (Parliamentary Budget Office estimated in March 2013 that true cost will be more than $4 billion.) Current resupply vessels to be retired in 2017, leaving two-year gap before first replacements arrive in 2019.

Arctic Offshore Patrol Vessels

Intended Purpose: Patrolling Canada’s Arctic during the summer months, and redeploying further south on the east and west coasts throughout the rest of the year.

Budget: $3.1 billion

Number: Six to eight

Construction Yard: Halifax

Background: First announced in 2007 after Conservatives promised three to four heavy icebreakers during 2006 federal election campaign. Delivery of first vesseloriginally scheduled for 2015, but since delayed to 2018. Government signed$288-million design contract with Irving Shipyards signed in March even though government-commissioned report raised concerns about high cost.

Heavy Icebreaker

Intended Purpose: Main icebreaker and flagship for Canadian Coast Guard. Providing

Budget: $1.3 billion

Number: One

Construction Yard: Vancouver

Background: First announced in 2008. Budget was initially set at $720 million, but revised to $1.3 billion in November 2013. Delivery initially scheduled for 2017, but scheduling conflict with joint support ships has pushed back delivery to at least 2022.

Canadian Surface Combatants

Intended Purpose: Main warships for the Royal Canadian Navy. Several variants are expected to be built.

Budget: $26.2 billion (preliminary)

Number: 15

Construction Yard: Halifax

Status: Very early in design stage. Intended to replace the navy’s destroyers and frigates. Budget never officially revealed until November 2013, though number could change. Delivery scheduled for mid-2020s, even though the navy’s destroyers are scheduled for retirement in 2017. The most expensive and complex part of the national shipbuilding plan.